1.3 – The EU – U.S. Aviation Agreement

By Peter van Fenema

fenemaThe Open Skies Agreement of 1992 between the US and theNetherlands provided Dutch airlines with unprecedented operationaland commercial possibilities. KLM Royal Dutch Airlines, by teamingup with Northwest and using the latter’s extensive domestic network,was able to open up the US market for its customers worldwide. Theremaining US competitors refrained from starting new services to orthrough the Netherlands, primarily because of the absence of aninteresting third and fourth freedom market.  The fact that the USgovernment had planned to use this novel air agreement, includingalliance approval and antitrust immunity, to pry open the Europeanmarkets of real importance for its carriers had never been a secret: itdid not prevent either the smaller European Open‐Skies partnersfrom grabbing this golden opportunity, or Germany, one of the UStargets, from joining the party in 1996. Fifteen years and someseventy‐five bilateral Open Skies agreements later, the internationalairline industry, on its way to ‘normalization’, witnesses anotherlandmark agreement that will now commit 27 EU member states andthe US to unprecedented liberalization. What are its possible effects, and what are the remaining challengesfor a small EU member state, like the Netherlands, and for its airline KLM?

The EU–US agreement: new rules of the game
After the EU–US aviation agreement was signed in March 2007, anumber of interesting initiatives and events could be noted:
– Virgin Atlantic announced that they were seriously consideringopening transatlantic operations from Paris, Frankfurt, Amsterdam and Madrid within two years; in a similar move, British Airways chose Brussels, Madrid and Paris to operate from,starting next summer (with a new subsidiary appropriately named “OpenSkies”);
– US carriers like Continental, Northwest and Delta, which have sofar been excluded, under Bermuda II, from operating on thelucrative US ‐ London Heathrow (LHR) route, announced plans tocommence services between their respective US hubs and thatairport as soon as possible, i.e. with effect from Summer 20081.
– British Airways threatened that, in the absence of furtherliberalization (re in particular, intra‐US cabotage and investmentin US airlines) by 2010, it would ask the British government touse its right under the agreement to suspend US traffic rights.

And a US government official later responded with an ominous“make my day!” ‐ type of gut reaction.2From an aeropolitical point of view, the Virgin Atlantic and BritishAirways plans, as mentioned above, are the most interesting post–agreement initiatives: as a result of the inclusion of the ‘Communitycarrier’‐concept in the agreement, any EU carrier is now allowed tooperate between any EU member state and the US. That is, provided that it complies with the prevailing national rules regarding‘establishment’.  This is a far‐reaching and major accomplishment for several reasons.Based on the ECJ ‘open skies’ judgments of 5 November 2002, theEuropean Commission and the individual member states have madeefforts since mid‐2003 to convince third countries to replacetraditional ownership and control clauses in the bilateral agreementsby the Community carrier clause. The results have been mixed:though the Commission was able to conclude ‘horizontal agreements’with 32 third countries (amending close to 500 bilateral agreements),and individual member states added a further 53 such countries(amending more than 100 bilateral agreements)3, so far, important aviation nations such as Brazil, South Africa, Japan, South Korea,China, India, Russia, Canada and the US had been conspicuouslyabsent from the list of convert‐countries.  The Commission has not only opened up, in one stroke, a $ 22 billionmarket (in annual revenues) to full competition for its constituentswith the US agreement, but it has also given the Community carrierconcept an added respectability that is difficult to ignore.This is good news for Air France and KLM. The US was originallywilling, on aeropolitical grounds, i.e. the existence of Open SkiesAgreements with the Netherlands and France respectively, to acceptthe status quo in the exercise of traffic rights under thoseagreements. However, KLM’s Community carrier status is now firmlyembedded in the EU–US agreement, which provides a legal basis forits acceptance and for the unencumbered exercise of all availabletraffic rights from whichever country in Europe it operates.Does that mean that life has become easier for Dutch governmentwhen negotiating with the important aviation countries mentionedabove (and with any other countries that have not yet embraced theCommunity clause or accepted the KLM Air France corporategovernance structure on aeropolitical or other grounds)? Fact of the matter is, of course, that the latter continue to have every right tochallenge KLM’s nationality under their bilateral agreements with the Netherlands: the US acceptance of the Community carrier concept is,legally speaking, none of their concern.4  Rather, when referring above to the agreement and the Communitycarrier concept as ‘difficult to ignore’, we have both the competitiveand psychological impact thereof in mind, in a way and to an extentcomparable to – and possibly exceeding – the effects of the originalUS Open Skies Agreements on global competition and theaeropolitical responses thereto (and v.v.). The EU–US agreementpromises sharply increased competition through the quasi‐totalcommercial and operational flexibility of the EU and US carriers in theNorth‐Atlantic market, with ensuing benefits for airlines, customersand economies as identified in recent comprehensive studies.5That, in turn, may, at first, lead to protectionist knee‐jerk reactionsfrom countries whose airlines feel    threatened by the increasedcompetitive power of the European airlines concerned.6But, as ambitious and dynamic economic powerhouses such as China andIndia begin to see the necessity of opening up the transport market,one may expect an increasing interest in similar ‘liberalization’ dealsas the one the US and the EU have just concluded, for the simplereason that the requirements of the national economy leave nochoice. And the Community clause will unavoidably be part of thedeal.In the mean time, there are a number of remaining challenges andopportunities for EU and US carriers:
– BA and Virgin are expected to preemptively ‘gobble up’ as manyattractive LHR slots as possible before EU or US newcomers gettheir pick7;
– Air France and KLM may consider combined or separatetransatlantic operations from LHR, but will be faced with morepressing demands for LHR slots from their US alliance partnersNorthwest and Delta, both ‘fit, willing and able’ and ‘post‐Chapter 11’ lean and low‐cost, to start their own operations,which may also carry the KLM and Air France codes8;
– European low‐cost carriers (LCCs) that are already established inand operating from a number of EU countries to third countrydestinations will consider the economic and competitiveprospects of applying their formula to transatlantic operations,preferably from EU countries with attractive markets and,preferably, weak national carriers, such as Italy9.The position of the Netherlands and KLMAn interesting question is, of course, what effects the above‐mentioned developments will further have on a small EU memberstate, like the Netherlands, and on its ambitious airline, and whatchallenges may lie ahead.First, an influx of other Community carriers into the Netherlands – USmarket is unlikely because of the limited size of third/fourth freedomtraffic and the dominance of hub‐carrier KLM.Second, Northwest’s transatlantic operations to/from LHR and othermajor European cities will be of direct financial benefit to KLMthrough the joint venture sharing arrangements between the twoairlines.10

Third, so far, the Dutch government and KLM have been able to getthe merger with Air France accepted by third countries withoutsubstantial financial or aeropolitical sacrifices. It may be expectedthat the increased respectability of the Community carrier conceptwill make their negotiations easier rather than more difficult.Fourth, given only the remote chance that 2ndstage EU–USnegotiations will produce a satisfactory outcome in 2010 (in view ofthe US presidential elections and strong domestic opposition tochanges in US law to accommodate EU priorities), the Netherlandsand other member states will have to decide whether aconfrontational approach, as suggested by the UK and possiblyembraced by the European Commission, will be in their interestand/or in Europe’s interest.  How much importance should the Dutch government and KLM attachto intra‐US cabotage and/or increased investment possibilities in UScarriers? And what about more access to ‘Fly America’ (USgovernment travel) than KLM, through code‐sharing with Northwest,already has? Are these issues indeed priority issues? On the otherhand, if the US would indeed be unfit, unwilling or unable, in thenegotiations to come, to contribute to meaningful progress, should itbe allowed to get away with that?

It is argued that the more immediate challenges for Europeanaviation lie elsewhere, i.e. in the non‐traffic rights sphere and onlypartly reflecting agreed EU‐US priorities11. Suffice it here to name themost threatening ones that affect the competitive position of EUairlines vis‐à‐vis their American and Asian counterparts:
– the inclusion of aviation in the European emission tradingscheme planned to go into effect in 2013,
– a fragmented European air traffic management system,
– new national taxes on aviation, and
– capacity/noise limitations at Schiphol airport (and otherEuropean airports) Fiscal, environmental and infrastructural issues are thus replacingtraffic rights and other liberalization items as the real stumblingblocks that stand in the way of a global level playing field. In thatrespect, aviation is gradually turning into an almost ‘normal’ industry.

1. American Airlines became the first US carrier to receive a novel ‘open skies’Certificate from the DOT, which automatically includes all future Open Skiescountries/destinations that become available for US carriers, including, of course, theEU, see DOT Order 2007‐4‐2 (Order issuing certificate), served April 3, 2007; the otherUS carriers are expected to receive comparable Certificates
2 EALA, 19thAnnual Conference, Dublin, 9 November 2007.
3 See “Bilateral ASA brought into legal conformity since ECJ judgments on 5 November2002 (updated 30.11.2007)” plus additional info at Air Transport Portal of theEuropean Commission – international aviation – horizontal agreements – latestdevelopments,http://ec.europa.eu/air_portal/international/pillars/developments/index_en.htm(accessed 24‐01‐2008)
4 And, in that sense, to suggest that the EU–US agreement has made internationalairline mergers easier or more feasible, without referring to third countries’ positionsor possible reactions, would seem a simplification not reflecting the reality of bilateralaviation relations, see The economic impacts of an open aviation area between the EUand the US, Final Report [prepared for European Commission, DG TREN], Booz AllenHamilton (January 2007), Chapter 8.2 ‘Mergers and acquisitions’ at 172‐173, andExecutive Summary: “An OAA includes the removal of investment constraints betweenthe parties and so leads to the possibility of airline mergers and acquisitions within andbetween the EU and US.” at vi.5See above Report, which refers to the 2002 Study of the Brattle Group, also preparedfor the European Commission.6E.g. with the airlines of the U.K.(!), Ireland, Spain, Greece and Hungary, until thesigning of the agreement the only remaining non – open skies EU member states, nowalso ‘fit’ for an alliance with US carriers (e.g. AA‐BA), inter‐alliance competition on the North‐Atlantic will further toughen and the survivors will be leaner and stronger andmore formidable competitors in the global market place.7The European Commission is expected to propose a Regulation in 2008 which allowsfor secondary trading of slots thus introducing the discipline of the market – and themight of the highest bidder – into the distribution of slots  8In fact, in summer 2008, KLM and Northwest plan to jointly operate services betweenLondon Heathrow (LHR) and Minneapolis/St Paul, Detroit and Seattle respectively,using KLM slots at LHR. Air France and Delta last year announced daily LHR – LosAngeles operations on Air France slots at LHR.
9 Immediately after the conclusion of the agreement, Ryanair’s CEO stated hisintention to start a new LCC, incl. business class (!), for flights between variousEuropean and American cities. In October 2007, Ryanair announced that discussionswere taking place with local US authorities with a view to start Dublin – Long Island(New York) operations as of Summer 2008.10The EU – US agreement has also improved the chances for the SkyTeam partners,incl. in particular Northwest and Delta, to get a final go‐ahead from the US DOT for full fledged network coordination and commercial cooperation, further strengthening their competitive position vis‐à‐vis other alliances.
11 For the 2ndstage negotiations, the Commission listed the following priority items:facilitating foreign investment, further liberalization, environmental and infrastructureconstraints, further access to Fly America and wet leasing.

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